Daniel P. Murphy: Will this tax bill 'Make America great again?'

Republicans rammed a nearly $1.5 trillion package overhauling corporate and personal taxes through the House on Thursday, edging President Donald Trump and the GOP toward their first big legislative triumph. (Nov. 16)
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Daniel Murphy, News Sentinel columnist. He is a professor of accounting at the University of Tennessee.(Photo: Paul Efird/News Sentinel)Buy Photo

The House recently passed the Tax Cuts and Jobs Act of 2017 (TCJA). The bill will now go to the Senate where a tax bill, if passed, will go to a conference committee before heading to the White House.

To watch and listen to the Republican House leadership react to the bill’s passage, you would think they had just passed a historic bill that will “make American Great Again.” Time to think again.

By now, it is clear that the President’s primary goal is to get a tax bill, any tax bill, through Congress and signed so he can claim political victory. Whatever the Republican leadership wants in the bill is theirs for the taking. Unfortunately for many Americans, what the TCJA delivers and what President Trump promised are two different things.

The President’s goals as outlined in his first tax proposal submitted last spring were to improve lower and moderate income families’ stagnant incomes through tax cuts, stimulate business by lowering corporate tax rates, and simplify the tax code. These are worthwhile objectives.

So, what does the TCJA deliver? Scraps to lower and middle income workers, windfalls to the wealthy, business tax relief that benefits US and foreign investors, and more tax compliance and planning complexity.

The TCJA offers lower- and middle-income taxpayers a higher standard deduction and a new child credit in exchange for an increase in the lowest tax rate, maintenance of the ACA mandate penalty, and a repeal of personal and dependent exemptions. Families with more than three kids will be worse off under the new rules. The impact of all of this “tax relief” on lower and middle income Americans? According to the Tax Policy Center (TPC), an increase in after tax income of less than one-half of one percent.

On the other hand, high-income taxpayers will see lower taxes on business income, continued low tax on investment income, and eventual repeal of the estate tax. The TPC estimates the impact of these measures on high income taxpayers’ after-tax income to be about two to three percent or six time higher than realized by moderate income taxpayers.

While much of the media coverage of this bill has focused on individuals, about 70 percent of the tax cuts and benefits accrue to business. Business tax relief comes in a number of ways. Corporate rates will drop from 35 to 20 percent. Since about 70 percent of the incidence of the corporate tax falls on investors, it is likely that a similar proportion of the tax cut benefits will accrue to them. The fact that around 35 percent of this tax benefit will be realized by foreign investors is galling. Other changes include an overdue reworking of the international tax rules and increased expensing of depreciable property. The TPC estimates the impact of these business tax changes will be six-tenths of one percent in 2018; helpful but not a game changer.

Simplifying the tax laws is a long-time goal of all politicians. The TCJA introduces enough new expense limits, phase-outs, and sunset provisions to keep the lawyers and CPAs busy for some time. The proposed reduced tax rate on pass-through business income (sole proprietorships, partnerships, S-corporations) will be the biggest boom in the tax shelter industry since the early ‘80s. As the bill stands now, tax strategies to convert salary income to business income will be coming out of the woodwork and adding tremendous complexity to the tax code.

A bill that addresses the stagnant income growth in lower and middle class incomes, improves business opportunities, and reduces complexity is worth pursuing. Unfortunately, the TCJA is not that bill. Congress would be well advised to try to pass a bi-partisan bill that actively involves the public in the process, and is focused on the needs of the majority and not just those of the few.

Dan Murphy, Ph.D., CPA, is a professor of accounting at the University of Tennessee.